西南航空 (LUV) 2010 Q1 法說會逐字稿

Welcome to the Southwest Airlines first quarter 2010 conference call.

Today's call is being recorded.

We have on the call today, Gary Kelly, Southwest's Chairman, President and Chief Executive Officer, and Laura Wright, the Company's Senior Vice President of Finance and Chief Financial Officer.

Before we get started, please be advised that this call will include forward-looking statements.

Because these statements are based on the Company's current intent, expectations and projections, they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially.

This call will also include references to non-GAAP results.

Therefore, please see our earnings press release, and the Investor Relations section of our website at southwest.com for further information regarding our forward-looking statements and for a reconciliation of our non-GAAP results to our GAAP results.

At this time I would like to turn the call over to Gary Kelly for opening remarks.

Please go ahead, sir.

Thank you, Robert.

Thanks, everyone for joining us this morning.

We are delighted with our first quarter results.

We had net income, excluding special items, of $24 million or $0.03 a share, which was in line with analysts' estimates.

With very high energy prices and a weak demand quarter seasonally, it is just very tough to make a profit in the first quarter, so just to have a profit, I think, is a very significant accomplishment.

I have already been asked today, well, how did our people do it?

I think it's very straight forward, we did it with industry-leading low costs.

We have done it with industry-leading revenue performances, and then finally with our great people.

We had another outstanding quarter in terms of our customer service performance, another quarter of excellent operations, and I'm very, very proud of our people.

It's been a significant transformation effort for them, a lot of change to manage, and so, again, to have these kinds of results, is just a -- a huge tribute to our people.

We have continued to aggressively tune our revenues with revenue management techniques, changes to our fare structure, and also with our network planning.

That had a very nice benefit in the first quarter, and of course, that will continue indefinitely.

Capacity was down 6.4% in first quarter.

And as a consequence our load factor was up.

We had a record 75.9% first quarter load factor.

That was up 6 points.

But also, bucking the normal trend, our yields were also up.

Normally when we see traffic rise and load factors rise, it's at the expense of yield.

Our yields were up 9.1%, which, again, is really helping to drive our revenue performance.

Just outstanding all the way around.

We set a number of records.

We had an all-time record quarterly unit revenue performance.

If you look back compared to 2007, our unit revenues are up over 25%, and of course, 19.3% just compared to last year's recessionary performance.

Second quarter, thus far, the trends are strengthening still.

We have very strong bookings in place for April, May, June.

We are looking forward to opening up Panama City in May, and I have been especially pleased with the strength of the bookings in that market.

Because we just don't have any history.

There is very little air service in Panama City.

We have a very unique partnership with the St.

Joe Company.

It's just, again, a testament to the strong Southwest network and also the brand that we enjoy.

The other real highlight, I think to report on, and a real star in the quarter was Denver.

We -- we thanked our people there over and over.

Our Denver performance is pretty incredible.

Our RASM was up in that market over 20%.

Our traffic is up over 20%, and we're adding capacity at the same time.

So just one example of how we're driving revenues at Southwest.

But with that very quick overview, and my thanks again to all of our people, and all of the great work that they have done.

Laura Wright, our Chief Financial Officer, is going to take us through the details of the quarter.

Thank you, Gary, and good morning, everyone.

To begin with, I would like to echo Gary's comments, and state that we're really pleased to report a first quarter profit.

Our first quarter GAAP net income was $11 million, or $0.01 per diluted share.

Excluding special non-cash charges totaling a net of $13 million, relating to mark-to-market and other items associated with FAS 143, our first quarter net income was $24 million or $0.03 per diluted share.

That compares to a net loss of $20 million or $0.03 loss per diluted share in first quarter of 2009, and these results were in line with Wall Street's mean estimates of $0.03.

Our improved first quarter results were driven by remarkably strong revenue performance.

Our passenger revenues were up over $240 million, or 10.8% and our other revenues were up $30 million or 40%, despite a capacity reduction of 6.4% during the quarter.

Our traffic continued to grow again this quarter by 1.6%, again, despite a 6.4% reduction in capacity.

We continued to believe we're gaining market share with our steadfast commitment to our Bags Fly Free campaign, and overall demand still primarily on the leisure side remains strong as evidenced by our record monthly load factors in each month of the quarter.

Our passenger revenue yields turned positive on a year-over-year basis during the quarter, for the first time since January of 2009, resulting in a 9.1% increase compared to the first quarter of last year.

This yield improvement strengthened throughout the quarter with January essentially flat, February up 9% to 10%, and March yields up 16% to 17%.

As a result of the year-over-year improvement in both our load factor, and our passenger yield, which is a combination we really like, we had an 18.4% year-over-year improvement in our first quarter passenger unit revenues.

As reported in our monthly traffic releases, the year-over-year improvements in our passenger unit revenues also improved throughout the quarter.

We began to see some signs of improvement in our business demand in March.

Our full fare mix in the first quarter was 20%, up slightly from the first quarter of last year, and up 2 points from the fourth quarter of 2009.

However, for the month of March, our full fare mix was up 3% versus March of 2009.

Although our year-over-year comparisons became easier starting in February, the mix improvement, particularly in our short-haul markets, indicates we're beginning to see some recovery in business travel demand.

Despite these encouraging trends, we have not recovered to the pre-recessionary levels that we saw pre-2009, but nonetheless, the trends appear to be moving in the right direction.

Demand for our Business Select product was strong in the quarter.

Our Business Select revenue was $21 million, that's up from $18 million in both the first and fourth quarters of last year, and we carried 15% more Business Select passengers in the first quarter this year.

Our Wright Amendment revenues were $47 million in the first quarter of 2010, a nice improvement from the $38 million from a year-ago's period, and we -- again, we continue to see significant benefit from our capacity cuts, our network realignment and our revenue management efforts, which combined, contributed hundreds of millions in revenues in the first quarter.

Overall we're very encouraged by the recent passenger revenue trend, and for the first half of April, our month to date passenger RASM is estimated to have increased in the 19% range, compared to the same period for April of last year.

And as Gary noted, our bookings, thus far, for May and June also look strong.

Based on our revenue and booking trends thus far, we're currently expecting another significant year-over-year improvement in our second quarter passenger unit revenues.

Our freight revenues were in line with the first quarter of last year as a reduction in our capacity was offset by higher average rates.

Our other revenues increased 40% from the first quarter of last year to $105 million, and that was primarily due to new revenue initiatives that were launched in the summer and fall of 2009.

Our EarlyBird revenues were approximately $17 million for the first quarter, that's up from $13 million in the fourth quarter of last year.

And we generated about $10 million in revenues on our pet fare, unaccompanied minor service charge, and excess heavy bags in the first quarter combined.

We expect a similar year-over-year performance in our freight and other revenues in the second quarter, as experienced in the first quarter.

Turning to our cost performance, our first quarter operating expenses, excluding special items, increased 8.7% compared to the first quarter of last year, due largely to higher energy prices.

Our economic fuel costs, including fuel taxes, increased 33% to $2.34 per gallon in the first quarter which was in line with what we anticipated.

Based on the current forward curve, crude prices are expected to increase with the back of this year forecasted close to $90 a barrel, and hovering at those levels or higher beyond 2010.

With the goal to minimize the impact of volatile energy prices, we continue to aggressively manage our fuel hedge portfolio, using a combination of collars, call options, and call spreads.

We provided our hedge positions for the remainder of 2010, including the second quarter in our press release this morning, but to break that down a bit further, for the second quarter, we're effectively 44% hedged at prices settling up to $100 per barrel.

We're also about 17% hedged in the second quarter if prices settle in the $100 to $120 per barrel range, and about 35% hedged if prices settle at above $120 per barrel.

Premium costs associated with our second quarter fuel hedge, which are recorded below the line in other gains and losses, are estimated to be in the $30 million range.

For the second half of this year, we're approximately 75% hedged at crude prices up to $100 per barrel.

That coverage drops to 50% if prices settle in the $100 to $120 per barrel range, and it increases to 75% if prices average above $120 per barrel.

Our premium costs for the second half of this year are estimated to be about $70 million.

Based on the April 20 market price, which was around $85 a barrel for the second quarter, we estimate that our second quarter, 2010 fuel costs, including taxes, but excluding premiums will be in the $2.40 to $2.45 per gallon range.

This estimate includes a $0.04 per gallon hedge penalty.

To provide you with some sensitivity with respect to our second quarter 2010 fuel hedge position and the corresponding fuel cost per gallon, if second quarter prices drop from current levels and average $75 a barrel for the quarter, our estimated hedging penalty increases to $0.17 per gallon.

However, if second quarter average prices rise from current levels and average around $95 per barrel for the quarter, we would expect to have a $0.07 per gallon hedging gain.

With respect to our fuel hedging strategy, we have not changed our fundamental philosophy that we must protect the enterprise against catastrophic energy prices and as opportunities unfold in this market that allow us to layer in protection in a cost-effective manner, we are well poised to react.

Looking at the full year of 2010, the volatility -- volatility that we're experiencing makes it quite difficult to provide for full-year guidance.

However, based on the current forward prices and our current hedge portfolio, our best estimate is a 2010 fuel price in the $2.45 per gallon range, and that equates to about a $0.06 per gallon penalty above current market prices for full-year 2010.

As of 2 days ago, the total net liability of our current fuel hedge portfolio was about $260 million.

Turning to non-fuel costs, our first quarter operating expenses, excluding fuel and special items, increased 2.7%, compared to the first quarter of 2009, or 9.8% on a unit basis driven primarily by the 6.4% year-over-year reduction in our capacity.

Increased profit sharing and revenue-related charges, which were primarily charge sale discounts, accounted for approximately 1 point of the 9.8% CASM ex-fuel increase.

Weather cancellations accounted for 1 to 2 points of the 9.8% year-over-year non-fuel unit cost increase.

And if you exclude the weather impact, our non-fuel unit cost performance was slightly better than we expected, primarily due to lower-than-expected maintenance expense.

However, continued inflationary cost pressures, most notably in our airport costs and our labor costs, are cause to strengthen our efforts to maximize our productivity gains.

Based on these existing cost pressures, we currently expect our second quarter 2010 unit costs, excluding fuel and related taxes, to significantly increase from second quarter 2009's 6.91 cents, but to decline from the first quarter 2010's 7.76 cents.

For full year 2010, our year-over-year unit cost pressures should ease somewhat in the back half of the year, compared to the first half as a result of very modest capacity additions in the third and fourth quarter.

With respect to airport costs, our first quarter landing fees, and other rental unit costs increased 21.7% year-over-year to 0.84 cents, primarily due to airport rate increases and fewer favorable airport audit adjustments this year.

Based on the continued rate inflation at various airports, we expect our second quarter 2010 airport unit cost to increase from second quarter 2009's 0.70 cents, but to decline slightly from our first quarter 2010's 0.84 cents.

Our first quarter salaries, wages, and benefits increased 10.4% to 3.82 cents over the first quarter of last year.

Higher wage rates and capacity reductions significantly contributed to the first quarter year-over-year increase.

The weather disruptions and related cancellations also increased our salaries, wages, and benefits during the quarter.

For the second quarter of 2010, we currently expect a similar year-over-year increase from second quarter 2009's 3.38 cents.

Our maintenance unit costs came in better than expected at 0.73 cents, a decrease of 3.9% from the first quarter of last year, primarily due to fewer than expected airframe events and lower engine expense with less flying due to the weather cancellations.

We currently expect our second quarter 2010 maintenance unit cost to be in line with second quarter 2009's 0.74 cents.

Our first quarter other operating expenses for ASM increased 9.6% year-over-year to 1.48 cents, primarily due to reduced capacity, and an increase in our revenue-related costs.

We expect a similar year-over-year increase in second quarter 2010's other operating expense unit costs.

Turning to the balance sheet, we ended the quarter with $2.8 billion in unrestricted cash and short-term investments, and we currently have core unrestricted cash and short-term investments of approximately $3 billion.

And our $600 million credit facility remains fully undrawn and available.

Our leverage, including aircraft leases, is in the low 40% range.

During the quarter, we have generated $373 million of cash flow from operations, with first quarter capital expenditures of $139 million.

For the full year 2010, we continue to expect our capital spending to be in the $600 million to $700 million range.

With respect to our fleet, we ended the first quarter with 541 aircraft.

During the quarter, we received three new airplanes from Boeing, and we returned one 737-300 on lease.

Our fleet and capacity plans are unchanged, with our full-year available seat mile capacity to be -- expected to be roughly flat with 2009.

And as I mentioned earlier, our year-over-year capacity declines are weighted the first half of the year, with our largest quarterly capacity decline behind us in the first quarter.

For the second quarter, we expect our available seat mile capacity to be relatively flat or slightly down from last year's second quarter, and our third and fourth quarters will both be up in the 2% to 3% range.

We've included an updated Boeing delivery schedule in the accompanying tables to the press release that was issued this morning.

Robert, with that Gary and I are now ready to take questions.

Thank you.

(Operator Instructions) We will pause for one moment while we assemble the queue.

You will hear music until we are ready to proceed.

We are now ready to proceed with questions.

Our first question comes from Hunter Keay of Stifel Nicolaus.

Thanks very much.

Question for you, would you consider a merger partner -- an out of bankruptcy merger partner that in all areas was attractive at face value, like bolting on a new geography, say 737 fleet, SWAPA buy in, good economics, but there was push back from the acquiree's labor groups?

Would that hold up you from pursuing something that would be accretive?

No, and I'm just taking your question literally.

I don't think it would hold us up from pursuing it, but there's a difference between pursuit and actually striking a deal.

It's really tough to talk about these things in theory or hypothetically.

Yes.

But we have a great company, we have a great culture, we have a great brand, and I believe we have tremendous growth opportunities.

They could come in the form of organic growth like we have enjoyed most of our history, but clearly we need to be open-minded and see if there is a way that we could accelerate our growth and strengthen the Company for the future by being open to a merger.

There's nothing new, Hunter in that view.

I think that's always been our view.

And we have acquired two airlines in our history, so I think there's evidence of that philosophy baked into our history.

Okay.

Great.

Thanks, Gary, and how far along were you on the IT side with the WestJet codeshare?

And with that termination, what -- is there another IT initiative that maybe moves up in the queue in terms priorities?

Well, we are -- that work was suspended in 2009, so that's not new news.

With the work that was spooled back up in the fall, we jointly agreed with our two codeshare partners, how we would approach that in terms of a work effort and timelines and deliverables in 2010.

So with that revised work plan that was developed last year, we're on track with that.

The work that we have in front of us was intended to serve both countries, both Canada and Mexico.

So I think in that respect, in other words, our work continues uninterrupted by the -- by the termination with Canada.

The other thing to mention is that it's always been our desire to have a limited number of codeshare partners, and part of -- it's more tactical in terms of where we go internationally with codeshare partners than strategic.

So, the point being that we felt like two partners was the right number to try to manage simultaneously.

Right now we're down to one, and I think we're happy with that.

If we can find another codeshare partner to an attractive market that fits in with our work plan over the next 12 to 24 months, I think we would be open to that.

But that's not anything that we are actively pursuing at this point.

I think we're very happy to concentrate on Mexico, and Volaris, who is a terrific partner to work with thus far.

Very good.

Thanks very much for the time.

Yes, sir.

Our next question comes from Bill Greene of Morgan Stanley.

Good afternoon.

Hi, Bill.

Gary, I'm wondering if we can think about something.

One of your low-cost competitors has started breaking out fuel costs from the ticket price, sort of creating a full surcharge concept for domestic tickets, and it seems to me that could be a powerful tool for Southwest given how low your ex-fuel unit costs are, but it also has an unbundling aspect to it, which I sense you would think is not a good thing.

So how do we think about the idea of offering a lower fare, plus a fuel cost?

Is that ever a good idea?

How do you think about that kind of idea?

Bill, as you were asking your question, I was just thinking that through.

I will admit to you that we haven't seriously considered that kind of a presentation.

And of course the DOT has rules on how one can advertise and present fare information.

I'm looking at Laura here.

I'm sure that there is complexity involved also in the way that one chooses to try to publish those kinds of things in various systems, but passing on some of the -- whether it's easy or hard for us to do those kinds of things, one of the things that I'm concerned about, as we evolve Southwest Airlines brand here is complexity, and we want to be transparent with our customers.

We want them to be able to trust the Southwest brand, to be able to count on Southwest to deliver on promises, and it -- it just seems to me that the -- the more you break that down, the more complex you make it, and the more apt you are to surprise customers.

Nobody likes to show up, and at the last minute be stuck with an additional charge, so -- but you ask a good question, and it's something that I think we could probably give a little bit more thought to, but I would admit to you, it is nothing that we have considered doing.

Okay.

I think Laura wanted to comment.

No, I think the DOT rules really do not allow us to advertise it separately.

So they are pretty specific on what is an add-on, like PFCs and TSA charges.

We couldn't market it and sell it on the internet as a surcharge under the rules that exist today.

And she makes a very good point, which I should have clarified.

All -- answering your question, all assumes that we publish it and market it in a way that meets the DOT rules, which at least one of our competitors right now, there are lines and lines and lines of small print that are required in order to comply with the adequate representation of the fares.

So, again, that just really violated everything that we're trying to do at Southwest, which is to keep it simple, keep it low, give good value to our customers, and I think especially with the economy the way it is, I just think our folks are delivering beautifully against that charge.

Okay.

No, that's a good answer.

So if I think about Southwest, and your competitive position now, there has obviously been a lot of talk in the press about M&A and all this sort of stuff, but what do you think Southwest's biggest competitive challenge is?

It's not so much the macro, I just mean what do you sort of think about on the competitive landscape, and kind of keeps you up at night, if you will?

Well, you -- redirect me if I'm on the wrong track here, Bill, but we -- we have -- I think very solid principles that we think about in terms of our strategy and our vision, and what we want to be, really, the best at Southwest Airlines.

So that's where my mind goes when you ask that question.

We are in a mode where we want to win more customers, and fortunately, we're delivering against that very powerful goal.

We have seen a very significant shift to Southwest Airlines over the last 24 months, probably for a variety of reasons, but we feel like we're really delivering against that.

Within that, I think, competitively, what would keep me up at night is we don't want to lose our competitive advantage with customers.

We don't want to lose the low-fare position in their mind.

We don't want to lose our operational excellence, and lose bags, and be late, so we just -- we really focus on the fundamentals at Southwest.

Alternatively, while we want to continue to invest in the customer experience, I consider that to be investing in the basics.

So I don't think you are going to see us chase the last customer by spending money foolishly, to add frills and amenities that most customers just don't appreciate.

So I don't think that takes us to an extreme.

All of that says you have got to have good people who care about each other, and who care about serving customers.

So to maintain our competitive advantage, I think more than anything, we have just got to maintain our very strong culture.

All right.

Thank you for the time.

Your next question comes from Jamie Baker of JPMorgan.

Hi, good afternoon, everybody.

Hi, Jamie.

Hi, Jamie.

Gary, profitability can be somewhat intoxicating.

In the past it has lead airlines to do some -- I don't know some odd things.

You have overseen the first reduction in supply in Southwest's history.

I think the margin results speak for themselves.

I suppose the question going forward is whether, from here, you are more interested in margin or in market share?

You did, after all, talk about growth opportunities.

Any thoughts on this?

Very fair question.

I think we are very, very focused on profitability in a way that is prosperous.

We haven't met our return on capital target in a decade, and that's just not acceptable to us, so we -- I think we all know why, and we all know what the history has been, but we are working as fast as we can to restore those -- those profit margins.

It is -- as you know, it's not like throwing darts, and we're going to make judgments about our outlook, about the future.

It's hard to predict when a volcano is going to erupt.

Fortunately that doesn't affect Southwest Airlines, but it is a very tough business, and we won't get it perfect, but I mention that in light of not really providing an excuse, but just also factoring in that we're going to need to be -- we're going to need to err on the side of caution here, unless we have a really compelling opportunity, back to Hunter's question.

And until we're comfortable that we're hitting our profit targets, it makes no sense to grow the fleet.

Now, I don't want you to take that too literally.

We may add five airplanes next year.

Yes.

But in terms of getting back to annual growth of 20 units a year, I just don't see that that is in the cards for us, unless we're hitting our returns.

We do have a belief, though.

We're going to be in 69 destinations next month with Panama City, and we believe we can do a lot more than that, and we are retooling Southwest so that international destinations ultimately, simply become a tactical decision instead of a strategy.

And we'll get there at some point.

So we do want to grow, and I think we have got some very powerful evidence, especially over the last year, that adding new cities actually helps our unit revenue production.

So, again, you are seeing record revenue numbers, fourth quarter, first quarter with four brand new cities, but we're able to do that, of course, by culling less effective markets in lieu of these better markets.

Yes, we want to grow, and we're hopeful that we can, but we're not going to do it if we're not hitting our profit target.

Got it.

Well, I appreciate the color on that.

And just a follow-up for Laura, looking at the RASM comps, they seem to get easier in May and June relative to April.

I realize you don't want to comment on May RASM, but is there anything structural, anything that occurred last year, new route activities, something that I'm forgetting about, that would otherwise prevent May RASM from being even better than April RASM, assuming that demand trends just kind of stay where they are?

I'm sitting here thinking, and I can't think of anything really structural.

Certainly, you have to look at what our capacity was doing last year between those months and what our capacity is doing this year between those months, as well as what is going on with what our competitors are doing in our markets.

But structurally there wasn't anything -- anything that I can -- that comes to mind.

I don't know if you can think of anything, Gary?

I agree with Laura, I can't think of anything either, but I tell you what, the way I have tried to evaluate our performance is it is so good, it's -- you are talking about 20%, plus or minus unit revenue growth, which now appears to be pretty consistent for a string of months, at least we hope, going forward, and I don't know how one can know -- is last year's number that we're using as the reference point, it is -- is it perfect?

Is it right?

There's just so many variables at play here.

If we can sustain something close to 20% for a while, I am very, very pleased with that.

And of course, it encourages us to take a few risks and try some new things, which is where new learnings come along, and one can afford to do that.

So we're doing a lot, as you know, with the schedule and with revenue management.

Some of those things may not work from time to time, and sometimes it takes us a while to evaluate that.

But a long story short, I think that the point I was trying to make with my opening marks, Jamie is as best we can distill a variety of questions about trends, we think that our trends in the second quarter look stronger than the trends that we have behind us in the first quarter, and exactly how all of the arithmetic works out, obviously remains to be seen.

Yes, I think -- just one other point that I think we just have to see.

When we looked at January, we looked at March, and this is kind of what we experienced after 9/11.

The really peak travel months do have a potential to outperform some of the -- and so those are things that we're watching as well, and I think we'll just have to see as more time -- get more evidence, so --

It's just all of the good things when we have more demand that just gives us more pricing power, and that was pretty evident there in March -- I completely agree with Laura.

April, May are more shoulder months, so I think they will be a little softer than May and June -- I'm sorry, than March and June, but -- but, again, that maps just very, very strong trends.

We're very happy.

Well, you don't be hear it from me very often, but good quarter.

Thanks a lot.

Thank you, Jamie.

It means a lot.

Our next question comes from Dan McKenzie of Hudson Securities.

Hi.

Hi, Dan.

Southwest is doing a great job of offsetting higher costs, with an assortment of revenue initiatives obviously, but for investors that look longer term, I'm wondering what kind of opportunity there is for Southwest to meaningfully lower costs, as you sit and look at your cost structure today.

Well, it's hard work, and it's -- we're obviously having a lot of success with our revenue initiatives, and we really felt like strategically, again, if you go back to 2005 and 2006 when we were spending a lot of time thinking about what we wanted to be next, that's where we felt like we had the greatest opportunity.

You have a very efficient airline, you have very productive employees turning out outstanding operations, so when you look across that spectrum, there's just not a lot broken.

Our employees do enjoy very good compensation packages, but they have earned them, and so as we go forward, we're going to be looking for continuous improvement, and -- to eliminate waste, and to eliminate inefficiencies.

You see that every single quarter, so our headcount per aircraft was down yet again in the first quarter.

So I think one's expectations needs to be realistic, and I think you should expect that we're going to work very hard to continue to keep our costs under control.

But I don't see the same kind of upside potential there that we -- as compared to what we have on the revenue side.

Understood.

I guess my second question is at what point is Southwest capacity constrained with incremental growth at Denver, Milwaukee, and Minneapolis?

Capacity constrained in the sense of facilities or aircraft?

Help me?

Yes, exactly, what facilities, and, I guess with respect to aircraft as well, because that also ties into the capacity part of the equation.

Well, I don't think there's any near-term issue with Milwaukee.

First of all, we started out Milwaukee, I think with a dozen daily departures, and we intend that we're going to sit there for a little while, and certainly that's my feeling today.

We don't have any plans, at least that I'm ready to share, that we want to grow Milwaukee from where we are.

Denver has been entirely different.

It has been a very high growth market.

We anticipated that it would be, although it has far exceeded our expectations, and I think we're in great shape in terms of the ground facilities in Denver.

If need be, there is, at least in the footprint of the airport, we can -- there's -- there's the ability to build out more space in terminal C which is the one that we operate in.

I think we are up to 15 gates there.

We'll be at 144 daily departures in August, and that -- I think all of that works just fine.

So long story short.

Not concerned about facilities there.

We were facility constrained in Philadelphia for a long time.

We have addressed that.

Feel real good about that.

But at least in the near term, the focus area for us in that respect is Denver.

We have got some growth opportunities in St Louis.

We have plenty of facilities there to expand.

So for a change, we don't have facility constraints as the issue for Southwest.

In most places, it's really the opposite, where there's plenty of facilities available.

Okay.

Thanks a lot.

I appreciate that.

Our next question comes from Helane Becker with Jesup & Lamont.

Good afternoon, everybody.

Thanks very much for taking my question.

Thank you, also, Laura, for answering my Wright Amendment question.

You anticipated that.

I put it in there just for you, so --

I know, right?

Thank you.

Just on St.

Louis Gary, I was just kind of wondering, American has pulled back so much, and I guess that has happened over the last couple of weeks.

So you might not be able to quite answer this yet, but I notice they are replacing a lot of mainline with a lot of regional jets, and I have to think your 737s would be a far more attractive plane than their R-jets.

Can you look out to your bookings in that market and see if share is shifting, and speak to that at all?

It's one of our -- I did -- I did highlight Denver with my opening remarks, which sort of implies that Denver is the only city showing 20-plus percent RASM improvement, and St Louis is in there too.

They have a very strong year-over-year performance.

I think we're today, roughly 73 daily departures, and we're going to go up to 83.

I do think that there is upside potential with St Louis.

I hope that our network planners aren't being too conservative there, but we don't know.

American was carrying a tremendous amount of flow traffic through St Louis, so it's not a one-to-one ratio here.

In other words if they drop one flight, it's not worth one flight's worth of additions to us, because we're obviously interested in local traffic.

But nonetheless, we have seen very strong share shifts.

We have seen a strong RASM performance.

We have got some needs to add some new non-stops for us out of St Louis, and all of that is out there and published, and it's definitely a good growth story for us.

That's good.

Because that was very helpful.

And then on -- I know -- you mentioned Panama City, which I think is going to be a very interesting airport for you, because I don't think there's any airport in the Panhandle right now.

I think you have to drive quite a distance.

Can you sort of look at your bookings for May and beyond in that market as it opens, and ascertain whether you are pulling passenger's away from Tampa or -- other markets that you might be serving that -- so that the growth might be less than you would anticipate?

Well, this one is -- this is a fun exercise for Southwest, because it -- we have been in an environment where we didn't want to take significant risk.

Opening up Panama City for an airline would be a significant risk.

Now that we have -- so we mitigated that with our relationship with the St Joe Company.

So we're very, very excited about this opportunity.

We think it's going to do very well.

We think we'll do well.

We think we can do good for the community.

One of the problems with trying to provide air service to the Panhandle or Northwest, Florida is actually there is a handful of airports.

Now we're not going to compete against Tampa.

That part of your question, I think you can easily eliminate.

We won't -- it's hundred of miles from Tampa around the coast, but you have Mobile, Alabama, Pensacola, Florida, Fort Walton Beach and then finally Panama City in the East.

So there -- the traffic that does fly is distributed among four airports, and what we hope to do, obviously, is to provide superior service now at Panama City.

Brand new airport, has virtually no air service today.

And that was our struggle, is how can we get comfortable with no history, that we can generate traffic there?

The Southwest brand is strong.

Our network is strong.

We have four non-stop markets with two daily departures each.

The bookings look very, very good.

It implies that we will have very solid load factors once we get up and running and I've told everyone at Southwest, I'm just stunned, because there was just no way to know, but it looks like it's going to be a great success and we are very anxious to get started.

And as you know, it will be a brand new airport.

So we don't know where the bookings are coming from.

And my recollection is from David Ridley our Senior VP of Marketing, that there are about 15 million visitors a year by automobile.

So part of the game here is to get them out of their mini vans and SUVs onto Southwest flights, and we don't need very many of them to fill eight flights up, so it looks like our strategy is going to work well.

Okay.

Great.

Thank you very much for that color.

I just have one other question, I think Dan McKenzie might have asked a variation of this.

Would you consider a joint venture with another airline in a market if it made economic sense to you.

In other words like in Milwaukee, where there's three airlines serving the market, probably not making very much, if any, money, and if two airlines maybe got together, it would make more economic sense.

Would you consider doing something like a joint venture?

Well, I think we are open to doing a codeshare, and that is a form of a joint venture.

We're -- we have said that we don't want very many codeshare partners, and our strategy has been to primarily -- well, to solely focus on codeshare partners to fly to places that we don't want to go.

So international markets, again, fit that profile better for us right now, although we may want to fly international one of these days too.

So we don't have any domestic codeshare partners.

And I'm -- that's not withstanding our agreement that we have with our pilots.

We don't have any codeshare partners, and we don't really desire to have any codeshare partners in the US, because we think we can serve US markets better than a codeshare partner.

Great.

That's a long-winded answer, but I think again, just to put it in perspective, we're open to codeshare partners beyond the 48 contiguous states in theory, and right now, we're -- we obviously just have one.

And right now, we're happy with that, we want to get our Mexican codeshare up and running.

Got it.

Okay.

Thank you very much for all of your help.

I appreciate it.

Thank you for all of your questions.

Our next question comes from Will Randow with Citi.

Hi, thanks.

Great quarter.

Thanks, Will.

In terms of your April RASM comparison, it looked pretty tough compared to the industry, and with your impressive month to date RASM growth, implying about 19% growth, just look at the multi-year comparisons relative to 2009.

That would reflect 19% growth in April, which is a couple of points higher than the first quarter, on a versus 2008 basis, implied by the 25% year-over-year RASM growth for the second quarter.

Is my -- is there something funny with my math, or is that kind of how it shakes out.

Well, we haven't given any specific RASM guidance for May and June.

Really what we have reported is that April -- mid-month, April, we were up year-over-year about 19% versus last year.

The -- I think -- I can't remember -- somebody asked us a question earlier, maybe it was Jamie.

April, May and June, and certainly the -- last year, the comp kind of got worse throughout there the quarter, but our point with him was there was just a lot of other pieces moving around in terms of capacity changes, and peak versus non-peak periods.

Is your capacity materially different throughout there the month within the quarter?

In April, May, June?

Let me look at that.

Second quarter is off from the first quarter.

Do you have it, Gary?

Yes.

Yes, it looks like we are continuing somewhat the first quarter trend.

We'll be down some in April, roughly flat in May, and up a little bit in June.

But -- yes, I don't -- I wasn't following your argument on how you got to 25%.

Well, I guess if you look at the comparison versus 2008, you are up 19%.

Okay.

In March at this level, and if you just run that multi-year comparison, you'll get to a 30%, which is a huge number for the following month.

Yes, I think the only thing I was trying to point out earlier is that sometimes when -- in predicting -- for -- the strength is there.

The revenue growth is very powerful.

We can see what is contributing.

We have new products we have introduced over the last 36, 24, 12 months.

They are working, et cetera, et cetera.

So -- but I think the point I was trying to make, that when you try to -- when you try to pin the growth to a relative period, it implies that all of those reference periods are pure, and they never are, and there are just so many things changing, that we're just not hung up on whether we do up 20 or up 18 or up 22.

We're just managing it as best we can.

So I'd -- I'm not uncomfortable with you saying it is 25%, personally, but there's no way I can attest to that forecast.

And then if I'm not mistaken, I think your capacity guidance may have moved up, or maybe it's just rounding errors in terms of the second quarter.

I think you were talking about down 1% last January.

Can you refresh us on your expectations by quarter for 2010?

It's all rounding.

We haven't made any changes whatsoever to our capacity plans for the year from what we talked about in January.

Second quarter is going to be down slightly, flat to down slightly, and full year is -- I think we said down maybe about 1% last -- is what -- I think we said in January, and I think you should think of it as flat to slightly down for the full year.

But no change at all in any of our aircraft or schedule plans.

And lastly, if I could squeeze one last one real quickly, in terms of your unit cost ex-fuel guidance, how should we think about the level of year over year change through the quarters?

Does it kind of go down to relatively flat when we hit the fourth quarter?

Maybe you are showing a similar pace of change in the second quarter relative to the first quarter?

Yes, well, it definitely improves each quarter of the year.

A lot of that is the changes in the capacity.

I would not be thinking of it as flat by the end of the fourth quarter.

As we talked about, we do have inflationary cost pressure in our airports, that's not going to go away in the third and fourth quarter, and we expect that we'll continue to have some year-over-year cost pressures in the back half of the year on the salaries, wages, and benefits side, just again, with very little growth.

The other areas that I noted in the first quarter that we had about a point increase in CASM just due to profit sharing and charge sell discounts, so certainly if we can continue to see our revenues grow at these rates, and our profits improve, we'll have a good CASM penalty associated with those two categories.

Thank you very much.

And we do have time for one more question at this time, and our last question will come from Duane Pfenningwerth of Raymond James.

Hi, thanks.

Regarding your 2011 hedge position, 60%, if you look at your hedges on a combined basis.

So, the new hedges and your existing hedges that you locked in some losses on, at what price is that 60% in the money?

At what price do you start to pay below market?

Yes, if you look at -- we're talking about 2011?

Yes.

Okay.

When you combine the new hedges and the old hedges at about a 90, mid $90 level in 2011, we are basically no gain or no loss based on the two hedges -- two hedge positions that we have.

Okay.

That's great.

And then just regarding RASM, understand we don't want to speak to specific levels of growth beyond the near term.

But, you were cutting your capacity in the second half of last year, and I don't know if it was just that or maybe a change in philosophy around revenue management, but you have these big year to year load factor increases in the second half of 2009.

And I wonder as you think about the second half of this year, comping against those big year to year increases in load, will it be more difficult to push yield only?

Or how should we think about that dynamic in terms of RASM growth as we comp against those big load factor increases last year?

I think that's a very fair and great question, and we -- we're not -- we have got good momentum.

We have got great momentum, and we're delighted with that, so we want to keep our revenue gains that we have earned -- we worked really hard to get it to this point.

The gains if you -- if you fast forward to 2011, what kind of gains should we expect there?

I don't think we can answer that question yet.

Now our goal is to continue to grind out some gains.

It will be harder to accomplish a 6-point load factor increase in the first quarter of 2011, so I think we will concede all of that.

So we'll need to look to some other tools.

Revenue management is far from done, and they will continue to do some aggressive pruning with their techniques, and they have an entire system, a replacement effort that is a plan for the next couple of years.

The other big thing, of course that's coming is a rapid rewards system replacement, and we really believe that that is going to bring with it a significant revenue contribution that we're not currently getting.

So I think the mechanical answer to your question is we'll continue to look for new sources of revenue along the way, and those, I think, can be most readily identified from our frequent flyer program and southwest.

com techniques, and then we're going to want to continue to perfect and grow the things that we have already introduced.

Quick example.

Business Select, it's doing $80 million, $90 million a year, we think, here in 2010.

EarlyBird a like amount.

They are brand new products.

The awareness among our customers is amazingly low.

So it sort of begs the question of what is the potential of those kinds of products?

Again, you go back to our marketing challenge.

We have a number of virtues that we would love to sell to our customers, and we have the great position of having to struggle with which ones?

Which ones do we sell?

So Bags Fly Free has worked famously now for us, but, again that's been somewhat at the expense of trying to push some of the other features that we really want to push.

Good question, I don't think we have unlimited potential with our load factor.

On the other hand, I don't think we're done, and we'll -- we'll certainly, as a goal, desire to boost our loads again next year, but it will be a combination of basic things.

Load factors, revenue management techniques, some modest fare increases, and we'll continue to pursue the introduction of new products.

Those three things.

Thanks very much.

Thanks Duane.

At this time I would like to turn the call back over to our moderators for any additional or closing remarks.

Thank you everyone for joining us today.

We appreciate your support.

If you have follow-up questions, the investor relations team will be standing by, and everybody have a great day and week.

Thank you.